Banking on an old system – why mortgage rating must change

Russell Gould

September 9, 2016

Russell Gould is chief executive of BlueZest

At the beginning of August the Bank of England (BoE) slashed interest rates from 0.5% to 0.25% in the hopes of insulating the economy from a Brexit triggered recession following Britain’s vote to leave the EU on 23 June. The lowest interest rate since the BoE was founded in 1694, this unprecedented move was supposed to help stabilise the market and encourage spending.

Governor Mark Carney’s announcement spelled great news for anxious Brits. Especially those with personal loans, credit cards and mortgages, who looked set to see the cost of borrowing fall. Or so was the plan.

Despite the BoE unveiling a new £100bn scheme to encourage banks to lend cheaply, it seems its call for calm and stability is falling on deaf ears. For instead of passing on the substantial rate cut to expectant customers, several leading high-street lenders have increased their rates in a move described as “defiant” and “sneaky” by industry experts.

The BoE has made its position clear repeatedly imploring lenders to act, saying they have “no excuse” not to pass on rate reductions, and that the positive economic effect should be felt “immediately”.

To anyone on the outside looking in, it’s an appalling state of affairs when several high-street banks appear to be more concerned with protecting their profit margins than playing a pivotal role in stimulating the economy. With rates as low as they are the margins or actual pound value being generated by lenders is simply not enough to accommodate the massive operational and infrastructure costs they are accumulating due to their archaic systems and processes.  So the mortgagees are paying for the lenders lack of investment in modern technology and their inability to match the BOE reductions.

Their tracker mortgage rates are among the most controversial as they’re directly linked to the BoE base rate and (should) rise and fall in line with any changes. Instead we’re seeing a selection of lenders insulate themselves by increasing their tracker rates and reducing their fixed rate deals.

Preferable due to their reduced fees, customers with tracker mortgages are often allowed to make early repayments, enabling them to pay down their debt faster and reduce the overall interest cost.

As one would expect, questions over ethics have arisen in such cases where customers are being made to continue paying a mortgage rate which is effectively double the cost that it should be. This is especially problematic when this very real saving could be repurposed to lower the cost of a customer’s overall mortgage.

Sadly, it’s the country’s first-time buyers who are most likely to feel the brunt in what’s shaping up to be the latest in a long line of disappointments for those eager to get on the property ladder.

Greatly affected by the double standards and self-interests of lenders, first-time buyers always seem to lose out. Recently stung by scandals surrounding the government’s Help to Buy scheme, new data from shows that the number of mortgage products available with a 5% deposit has reduced by 16% since March of this year.

To add further insult to injury, figures from the British Bankers Association show a similarly bleak outlook, with mortgage rate approvals taking a nosedive in July, plummeting to their lowest level in 2016 – down 19% on the same period last year.

By all accounts it would seem that the status quo is conspiring against first-time buyers, who should be being actively encouraged to step onto the property ladder –especially in a post-Brexit climate where low interest rates and a respite in ever climbing house prices should inspire consumer confidence.

While the outlook is bleak, all is not lost. The majority of lenders have heeded the BoE’s advice proposing rate cuts that will take effect on 1 September. Yet, while others continue to hide behind “rate reviews” it’s clear that a new, more radical approach to mortgage rating is needed. Maybe the lenders simply cannot accommodate the rate reduction and still be viable…

Customers occupying all rungs of the property ladder have come to expect a transparent and cost effective product from their lender. Technological advancements and customer service gains in other industries are only serving to highlight the outdated ways in which lenders currently process mortgages when margins are thin.

Whatever the leading lenders decide to do in the coming months, it’s imperative the mortgage sector innovate and adapt to ensure everyone gets a fair deal. More will need to be done to encourage new lenders to enter the marketplace, bringing with them a fleet of game-changing products.

Old systems must be challenged in order to offer customers a better alternative. For only by revolutionising the industry from the inside out, and confronting unfair practices head-on can real change begin.

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